From fiscal hole to rising debt mountain
As Parliament closes and we set sail for the election, it is time for our country to have a serious chat about Government spending. Everybody agrees the Government needs to spend more in response to the Covid19 pandemic but the sheer amount of money being firehosed all over the place has got completely out of hand.
In this year’s Budget, just three months ago, the Government announced a whopping $62 billion for Covid-19 related initiatives. For context, in the 2018 financial year the New Zealand Government spent a total of $80b on operating the entire government and all the public services, welfare, superannuation — everything.
Of the $62b, Grant Robertson left around $20b unspent at Budget time. That was for future eventualities like another wave of the pandemic. Fast forward just over two months and on July 20 he announced he had allocated another $6b of that $20b. If he’s not careful, the whole lot will be gone by Christmas.
This is not money we saved for a rainy day as the Government is prone to suggesting. It is all going on the overdraft. We are all on the hook for it. Just one year ago Treasury was predicting net debt would top out at $70b. Now it’s expected to reach $200b.
Some say that’s still lower than some countries as a percentage of our economy, blithely ignoring our small size and our ongoing high levels of private sector debt. The reality is that for the next generation or two we are going to be severely restricted in what public services we can fund because of the spending decisions being made in our name today.
So how is this money being spent? Well, it makes interesting reading.
There is of course the worthy stuff. The Government took a leaf out of the Christchurch and Kaiko¯ura playbook with the wage subsidy, which is doing the job of keeping people attached to the labour market even though hours worked in New Zealand dropped by 10 per cent in the last quarter.
I also wouldn’t argue with the health spending — although it would be good if the Health Minister kept some performance requirements on hospitals. We have too little to show for all of that extra money.
From there on in, it’s a lot more ropey. You will be pleased to know, for example, that the Government has ladled out a massive $276 million to create workforce development councils and regional skills leadership groups: a bunch of worthies being paid to sit around prognosticating on the skills businesses need. You are spending $360m on a cycleway across Auckland’s Harbour Bridge, $280m propping up New Zealand Post and $45m helping horticulturalists “seize the opportunity for growth”. You are building two new synthetic horse racing tracks and spending a cool $50m on a a “racing transition agency”.
In the last week alone, the Government made 25-odd different spending announcements. There is $350m to underwrite house building, $30m on a sports hub for Upper Hutt, $220m on yet another national cycleways package, $100m on climate resilience for councils, $40m more for the Chatham Islands, $62m for various business ventures in Rotorua, and $18m for a commercial property development in Te Puke.
On top of all of that, they have just proudly announced that they have given a quarter of a billion dollars to a total of 126 lucky tourism businesses. I say lucky because thousands of other tourism businesses presumably don’t qualify.
It’s getting to the point where the only people who don’t warrant the taxpayers’ munificence are the poor ignored aluminium smelter workers of Southland, who must have done something to offend Megan Woods in a past life.
A lot of this spending falls in the “nice to have” category and that seems to be the problem. This Government has been spending like crazy both on the Covid response, plus all the stuff it would like to do if there wasn’t a pandemic. The outcome is going to be an absolute mountain of debt.
In more normal times, a constraint on Government spending would be interest rates. As our debt goes up we get riskier and lenders start demanding a bigger interest premium. Conveniently, that is absent this time. The Reserve Bank
Just one year ago Treasury was predicting net debt would top out at $70b. Now it’s expected to reach $200b.
money-printing machine is whirring away producing an extra $60b in paper notes to keep interest rates at record lows.
Finance Minister Grant Robertson has started attacking anyone who doesn’t support his spending track as being in favour of austerity, which is rubbish. The debate is about just how profligate our spending should be.
Of course he has form. My prediction that he’d spend nearly $12b more than his 2017 pre-election plan was “an affront to democracy”. The true number, according to Treasury, turned out to be $19b, and that was before Covid-19.
The truth is that if someone was keeping a careful eye on the spending spigot we could save a lazy $10b here, $5b there, and shoot the provincial welfare fund, and that massive debt mountain could quickly end up quite a bit smaller and more manageable.
It’s a debate we need to have. We are leaving no borrowing capacity in reserve if, God forbid, we have another natural disaster.
The big question for all of us is the one our children and grandchildren will ask as they labour over a decade or more to get the government books back in order. “Where were you during the great spending splurge of 2020? Didn’t anybody do anything?”